A firm will find it profitable to buy a product from outside instead of making it in house only if t...........

Costing ( Revenue Account ) Basics of Cost Control and Analysis

A firm will find it profitable to buy a product from outside instead of making it in-house only if the supplier’s selling price is lower than the firm’s:

variable cost

fixed cost

works cost

total cost

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Explanation:

Let’s break this down:

- Variable cost (Option 1): That’s the extra cost the firm would avoid if it buys from outside instead of making the product itself. When you consider buying versus making, the key is—can you get it for less than what it costs just to make one more unit yourself? If the supplier’s price is below your variable cost, buying makes sense.

- Fixed cost (Option 2): These costs don’t change whether you make the product or not—think rent or salaried staff. They stick around anyway, so they’re not the deciding factor here.

- Works cost (Option 3): This usually means total production cost, including both variable and some allocated fixed costs. Not the baseline for this decision.

- Total cost (Option 4): That’s all your costs, variable and fixed, dumped together. But again, you don’t save all of these by outsourcing, just the variable piece.

Correct Answer: Option 1 - variable cost.